Location Strategies
8
PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Thirteen Edition, Global Edition
Principles of Operations Management, Eleventh Edition
PowerPoint slides by Jeff Heyl
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
8-1
Outline
►
Global Company Profile:
FedEx
The Strategic Importance of Location
► Factors That Affect Location
Decisions
► Methods of Evaluating Location
Alternatives
► Service Location Strategy
► Geographic Information Systems
►
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8-2
Location Provides Competitive
Advantage for FedEx
▶ Central hub concept (superhub)
▶ Enables service to more locations with
fewer aircraft
▶ Enables matching of aircraft flights with
package loads
▶ Reduces mishandling and delay in transit
because there is total control of packages
from pickup to delivery
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8-3
Learning Objectives
When you complete this chapter you
should be able to:
8.1 Identify and explain seven major factors
that effect location decisions
8.2 Compute labor productivity
8.3 Apply the factor-rating method
8.4 Complete a locational cost-volume
analysis graphically and mathematically
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8-4
Learning Objectives
When you complete this chapter you
should be able to:
8.5 Use the center-of-gravity method
8.6 Understand the differences between
service- and industrial-sector location
analysis
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8-5
The Strategic Importance of
Location
►
One of the most important decisions
a firm makes
►
Increasingly global in nature
►
Significant impact on fixed and
variable costs
►
Decisions made relatively
infrequently
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8-6
The Strategic Importance of
Location
►
Long-term decisions
►
Once committed to a location, many
resource and cost issues are difficult
to change
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8-7
The Strategic Importance of
Location
The objective of location strategy is
to maximize the benefit of location
to the firm
Options include
1. Expanding existing facilities
2. Maintain existing and add sites
3. Closing existing and relocating
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8-8
Location and Costs
►
Location decisions require careful
consideration
►
Once in place, location-related costs
are fixed in place and difficult to
reduce
►
Effort spent determining optimal
facility location is a good investment
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8-9
Factors That Affect Location
Decisions
▶ Globalization adds to complexity
▶ Drivers of globalization
▶ Market economics
▶ Communication
▶ Rapid, reliable transportation
▶ Ease of capital flow
▶ Differing labor costs
▶ Identify key success factors (KSFs)
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8 - 10
Location Decisions
Country Decision
Key Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
Figure 8.1
6. Exchange rates and currency
risks
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8 - 11
Location Decisions
Region/
Community
Decision
Key Success Factors
1. Corporate desires
2. Attractiveness of region
3. Labor availability and costs
MN
4. Costs and availability of utilities
WI
5. Environmental regulations
MI
IL
IN
OH
6. Government incentives and fiscal
policies
7. Proximity to raw materials and
customers
Figure 8.1
8. Land/construction costs
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8 - 12
Location Decisions
Site Decision
Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues
Figure 8.1
6. Customer density and
demographics
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8 - 13
TABLE 8.1
Global
Competitiveness
Index of
Countries
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Competitiveness of 137 Selected
Countries
COUNTRY
2018 RANKING
Switzerland
1
U.S.
2
Singapore
3
Netherlands
4
Germany
5
Hong Kong
6
Canada
14
Israel
16
China
27
Russia
38
Mexico
51
Vietnam
55
Haiti
128
Mozambique
136
Yemen
137
8 - 14
Factors That Affect
Location Decisions
►
Labor productivity
►
Wage rates are not the only cost
►
Lower productivity may increase total cost
Labor cost per day
Productivity (units per day)
= Labor cost per unit
South Carolina
$70
60 units
= $1.17 per unit
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Mexico
$25
20 units
= $1.25 per unit
8 - 15
Factors That Affect
Location Decisions
►
Exchange rates and currency risks
►
Can have a significant impact on costs
►
Rates change over time
►
►
Operational hedging – shift production as
exchange rates change
Costs
►
►
Tangible – easily measured costs such as
utilities, labor, materials, taxes
Intangible – not as easy to quantify and include
education, public transportation, community,
quality-of-life
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8 - 16
Factors That Affect
Location Decisions
►
Exchange rates and currency risks
►
Can have a significant impact on costs
►
Rates change over time
►
Operational hedging – shift
production
as
Location
decisions
exchange rates change
based on costs
► Costs
alone can create
► Tangible – easily measured
costs such
as
difficult
ethical
utilities, labor, materials, taxessituations
►
Intangible – not as easy to quantify and include
education, public transportation, community,
quality-of-life
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8 - 17
Factors That Affect
Location Decisions
►
Political risk, values, and culture
►
National, state, local governments' attitudes
toward private and intellectual property,
zoning, pollution, employment stability may
be in flux
►
Worker attitudes toward turnover, unions,
absenteeism
►
Globally cultures have different attitudes
toward punctuality, legal, and ethical issues
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8 - 18
Ranking Corruption
Least
Corrupt
Most
Corrupt
Rank
Country
1
2
3
6
8
12
16
20
51
77
135
180
New Zealand
Denmark
Finland, Norway, Switzerland
Singapore, Sweden
Canada, UK
Germany
USA
Japan
South Korea
China
Mexico, Russia
Somalia
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2017 CPI Score
(out of 100)
89
88
85
84
82
81
75
73
54
41
29
9
8 - 19
Factors That Affect
Location Decisions
►
►
Proximity to markets
►
Very important to services
►
JIT systems or high transportation costs may
make it important to manufacturers
Proximity to suppliers
►
Perishable goods, high transportation costs,
bulky products
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8 - 20
Factors That Affect
Location Decisions
►
Proximity to competitors (clustering)
►
Often driven by resources such as natural,
information, capital, talent
►
Found in both manufacturing and service
industries
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8 - 21
Clustering of Companies
TABLE 8.3
Clustering of Companies
REASON FOR
CLUSTERING
INDUSTRY
LOCATIONS
Wine making
Napa Valley (U.S.)
Bordeaux region
(France)
Natural resources of land
and climate
Software firms
Silicon Valley,
Boston, Bangalore,
Israel
Talent resources of bright
graduates in
scientific/technical areas,
venture capitalists nearby
Clean energy
Colorado
Critical mass of talent and
information, with 1,000
companies
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8 - 22
Clustering of Companies
TABLE 8.3
Clustering of Companies
REASON FOR
CLUSTERING
INDUSTRY
LOCATIONS
Theme parks
(Disney World,
Universal Studios,
and Sea World)
Orlando, Florida
A hot spot for
entertainment, warm
weather, tourists, and
inexpensive labor
Electronics firms
(Sony, IBM, HP,
Motorola, and
Panasonic)
Northern Mexico
NAFTA, duty free export to
U.S. (24% of all TVs are
built here)
Computer hardware Singapore, Taiwan
manufacturers
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High technological
penetration rate and per
capita GDP,
skilled/educated workforce
with large pool of engineers
8 - 23
Clustering of Companies
TABLE 8.3
Clustering of Companies
INDUSTRY
LOCATIONS
REASON FOR
CLUSTERING
Fast food chains
Sites within 1 mile of
(Wendy’s,
each other
McDonald’s, Burger
King, Pizza Hut)
Stimulate food sales, high
traffic flows
General aviation
aircraft (Cessna,
Learjet, Boeing,
Raytheon)
Wichita, Kansas
Mass of aviation skills (6070% of world's small
planes/jets are built here)
Athletic footwear,
outdoor wear
Portland, Oregon
300 companies, many
owned by Nike, deep talent
pool and outdoor culture
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8 - 24
Factor-Rating Method
►
Popular because a wide variety of factors
can be included in the analysis
►
Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor and
total the score for each location
6. Make a recommendation based on the highest
point score
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8 - 25
Factor-Rating Example
TABLE 8.4
Weights, Scores, and Solution
SCORES
(OUT OF 100)
KEY SUCCESS
FACTOR
WEIGHTED SCORES
WEIGHT
FRANCE
DENMARK
FRANCE
DENMARK
Labor availability
and attitude
.25
70
60
(.25)(70) = 17.50
(.25)(60) = 15.00
People-to-car ratio
.05
50
60
(.05)(50) = 2.50
(.05)(60) = 3.00
Per capita income
.10
85
80
(.10)(85) = 8.50
(.10)(80) = 8.00
Tax structure
.39
75
70
(.39)(75) = 29.25
(.39)(70) = 27.30
Education and
health
.21
60
70
(.21)(60) = 12.60
(.21)(70) = 14.70
Totals
1.00
70.35
68.00
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8 - 26
Locational
Cost-Volume Analysis
►
An economic comparison of location
alternatives
►
Three steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the costs for each location
3. Select location with lowest total cost for
expected production volume
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8 - 27
Locational Cost-Volume
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
City
Athens
Brussels
Lisbon
Fixed
Variable
Total
Cost
Cost
Cost
$30,000
$75
$180,000
$60,000
$45
$150,000
$110,000
$25
$160,000
Total Cost = Fixed Cost + (Variable Cost x Volume)
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8 - 28
Locational Cost-Volume
Analysis Example
Crossover point – Athens and Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
x = 1,000
Crossover point – Brussels and Lisbon
60,000 + 45(x) = 110,000 + 25(x)
20(x) = 50,000
x = 2,500
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8 - 29
Locational Cost-Volume
Analysis Example
Annual cost
Figure 8.2
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
|
–
0
Athens
lowest
cost
Lisbon
lowest
cost
Brussels
lowest cost
|
|
|
|
|
|
500
1,000
1,500
2,000
2,500
3,000
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Volume
8 - 30
Center-of-Gravity Method
►
Finds location of distribution center
that minimizes distribution costs
►
Considers
►
Location of markets
►
Volume of goods shipped to those
markets
►
Shipping cost (or distance)
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8 - 31
Center-of-Gravity Method
►
►
Place existing locations on a
coordinate grid
►
Grid origin and scale are arbitrary
►
Maintain relative distances
Calculate x and y coordinates for
'center of gravity'
►
Assumes cost is directly proportional
to distance and volume shipped
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8 - 32
Center-of-Gravity Method
 xi Qi
x-coordinate of the  i
center of gravity
 Qi
i
 yi Qi
y-coordinate of the i

center of gravity
Q
i
where
i
xi = x-coordinate of location i
yi = y-coordinate of location i
Qi = Quantity of goods moved to or from
location i
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8 - 33
Center-of-Gravity Method
TABLE 8.5
Demand for Quain's Discount Department Stores
STORE LOCATION
NUMBER OF CONTAINERS
SHIPPED PER MONTH
Chicago
2,000
Pittsburgh
1,000
New York
1,000
Atlanta
2,000
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8 - 34
Center-of-Gravity Method
Figure 8.3
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –
x1 = 30
y1 = 120
Q1 = 2,000
60 –
30 –
|
–
Atlanta (60, 40)
|
|
|
|
|
30
60
90
120
150
East-West
Arbitrary
origin
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8 - 35
Center-of-Gravity Method
x-coordinate =
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 2000
= 66.7
y-coordinate =
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 2000
= 93.3
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8 - 36
Center-of-Gravity Method
Figure 8.3
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
+
90 –
Center of gravity (66.7, 93.3)
60 –
30 –
–|
Atlanta (60, 40)
|
|
|
|
|
30
60
90
120
150
East-West
Arbitrary
origin
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8 - 37
Transportation Model
►
Finds amount to be shipped from
several points of supply to several
points of demand
►
Solution will minimize total production
and shipping costs
►
A special class of linear programming
problems
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8 - 38
Worldwide Distribution of
Volkswagens and Parts
Figure 8.4
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8 - 39
Service Location Strategy
Major Determinants of Volume and Revenue
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics
of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management
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8 - 40
Location Strategies
TABLE 8.6
Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL
GOODS-PRODUCING
REVENUE FOCUS
COST FOCUS
Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/lighting
Appearance/image
Cost determinants
Rent
Management caliber
Operation policies (hours, wage
rates)
Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor; raw
material; taxes, and so on
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local
government
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8 - 41
Location Strategies
TABLE 8.6
Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL
GOODS-PRODUCING
TECHNIQUES
TECHNIQUES
Regression models to determine
importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
Transportation method
Factor-rating method
Locational cost–volume analysis
Crossover charts
ASSUMPTIONS
ASSUMPTIONS
Location is a major determinant of
revenue
High customer-contact issues are critical
Costs are relatively constant for a given
area; therefore, the revenue
function is critical
Location is a major determinant of cost
Most major costs can be identified
explicitly for each site
Low customer contact allows focus on
the identifiable costs
Intangible costs can be evaluated
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8 - 42
How Hotel Chains Select Sites
►
Location is a strategically important decision
in the hospitality industry
►
La Quinta started with 35 independent
variables and worked to refine a regression
model to predict profitability
►
The final model had only four variables
►
Price of the inn
►
Median income levels
►
State population per inn
►
Location of nearby colleges
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8 - 43
How Hotel Chains Select Sites
►
Location is a strategically important decision
in the hospitality industry
►
La Quinta started with 35 independent
variables and worked to refine a regression
model to predict profitability
►
R2 = .51
The final model had only four variables
►
Price of the inn
►
Median income levels
►
State population per inn
►
Location of nearby colleges
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51% of the
profitability is
predicted by
just these
four variables!
8 - 44
Geographic Information
Systems (GIS)
►
Important tool to help in location analysis
►
Enables more complex demographic analysis
►
Available databases include
►
Detailed census data
►
Detailed maps
►
Utilities
►
Geographic features
►
Locations of major services
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8 - 45
Geographic Information
Systems (GIS)
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8 - 46
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8 - 47